According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn of money under management - was a fraud and had been insolvent for years, losing at least $50bn.

He said he was "finished", that he had "absolutely nothing" and that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.

He told them that he planned to surrender to the authorities but not before he used his last $200m-$300m to pay "selected employees, family and friends".

Under a Ponzi scheme, which is similar to pyramid schemes, investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors.

On Thursday, two agents from the FBI went to his apartment.

Investors have withdrawn from hedge funds amid market volatility

According to the complaint, Mr Madoff told them he knew why they were there, and said there was "no innocent explanation".

He told them he "paid investors with money that wasn't there", that he was "broke" and "insolvent", that it "could not go on" and he expected to go to jail.

Stunning fraud

If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.

"Our complaint alleges a stunning fraud - both in terms of scope and duration," said Scott Friestad at the SEC. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors."

Dan Horwitz, Mr Madoff's lawyer, said: "Bernard Madoff is a longstanding leader in the financial services industry. We will fight to get through this unfortunate set of events."

Many investors have been pulling money out of hedge funds in an effort to reduce their exposure to risk.

"This is a major blow to confidence that is already shattered - anyone on the fence will probably try to take their money out," said Doug Kass, president of Seabreeze Partners Management, a hedge fund.

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